Shearman & Sterling LLP | FinReg | European Money Markets Institute Consults on Hybrid Methodology for Euribor
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  • European Money Markets Institute Consults on Hybrid Methodology for Euribor
    The European Money Markets Institute has published a consultation paper seeking views from stakeholders on a hybrid determination methodology for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.

    Euribor is currently determined using a survey approach entailing the collection of quotes from contributing panel banks active in the euro money markets, supplemented by expert judgement. In line with the Financial Stability Board's 2014 report, "Reforming Major Interest Rate Benchmarks", EMMI has been working towards a methodology which will strengthen Euribor by underpinning it, to the greatest extent possible, with real transaction data. In 2016, EMMI proposed a new determination methodology for Euribor that was fully anchored in real transactions. However, viability testing of the proposed methodology revealed that a seamless transition from a quote-based to a fully transaction-based methodology was not feasible.

    EMMI is now proposing a three-level "hybrid" methodology, under which the calculation of Euribor at particular defined tenors is supported by euro money market transaction data from contributing panel banks whenever available and relies on other related market pricing sources when necessary. Where these data are not available, Euribor will be calculated using contributing panel banks' appreciation of their funding costs. Level 1 uses panel banks' "Eligible Transactions". EMMI is currently studying the introduction of a threshold on the number of Eligible Transactions a panel bank must have for a Level 1 submission to be possible. Level 2 involves the calculation of a panel bank's submission, using a hierarchy of three available submission techniques, where a bank has insufficient Eligible Transactions to make a Level 1 submission. Level 3 applies where a panel bank's submission at a given defined tenor cannot be made using either a Level 1 or Level 2 methodology. The bank should determine its Level 3 submission, by reference to permissible data sources, through the application of a combination of modelling techniques and/or the panel bank's judgement. The changes have many parallels to the LIBOR reforms proposed by LIBOR's administrator, ICE Benchmark Administration Ltd.

    EMMI is also consulting on issues such as whether to discontinue the calculation and publication of three of the eight tenors it publishes due to low levels of activity underpinning the markets those tenors represent and on other aspects of the publication process that concern the market.

    EMMI invites responses to the consultation by May 15, 2018 and also welcomes any additional views and considerations that are not covered in the consultation paper. EMMI intends to publish a summary of responses during June 2018.

    View the consultation paper.

    View the LIBOR Output Statement.

    View the latest ICE Benchmark Administration press release.